The CML on Scotland's housing market vs the rest of the UK

There is political uncertainty across the UK and it is perhaps even more pronounced in Scotland.

The CML on Scotland's housing market vs the rest of the UK

Caroline Offord is data and research analyst at the Council of Mortgage Lenders

Scotland is the second largest housing market in the UK, accountingfor around 30% of the UK's land mass and accommodating around 10% ofits population.Here, we review how the Scottish market compares to the rest of the UK, looking at how it has fared in recent years and the range of different housing practices and policies operating in the country.

The housing market

The Scottish housing market has roughly mirrored the UK overall. There have been two particularly pronounced boom-and-bust cycles in the late 1980s and early 1990s and, more recently, during the financial crisis in 2008/2009, in which after a period of rapid house pricegrowth there was a subsequent fall, with transaction volumes falling, too.

Chart 1: Nationwide house price index: Scotland and UK

20170418 Scotland analysis News and Views - chart 1

Source: Nationwide

While the timing has reflected the rest of the UK, the height and depths were less pronounced. Average house prices in Scotland have not yet returned to their peak levels, whereas in the UK they have now overshot the previous peak by 15%.

During 2016, house price growth in Scotland, at 3.5%, was more subdued than in the UK overall (7.2%). But there is large variation across Scotland – ranging from a 26% increase in the Shetland Islands to a 10% fall in Aberdeen.

As in the rest of the UK, the financial crisis led to a significant drop in activity. Transaction volumes halved from around 150,000 a year in 2007 to around 70,000 in 2011. First-time buyers were particularly affected, with the number falling by almost 60% between 2006 and 2011 as affordability, and particularly higher deposit requirements, made it especially hard for first-time buyers to access the market.

Since 2011, property transactions have picked up but remain significantly below 2006 levels. First-time buyer numbers have almost doubled to account for almost half of purchases with a mortgage (up from around 35% at the time of the financial crisis). But this partly reflects the lack of growth in lending to home movers and volumes of first-time buyers are still below the 2006 peak level (chart 2).

Mortgage lending to movers in Scotland has recovered very little since the financial crisis,as inthe rest of the UK. The number of mortgages to movers in Scotland halved from 66,000 to 27,500 between 2006 and 2011. By 2016 there had been a modest increase to 32,100 loans. But, mirroring the trend in the rest of the UK, this group of borrowers account for a shrinking share of the house purchase market – falling from almost two-thirds in 2007 to just over half in 2016.

Chart 2: Lending to first-time buyers and movers in Scotland

20170418 Scotland analysis News and Views - chart 2

Source: CML regulated mortgage survey

Other types of housing transactions have contributed to the recovery in Scotland, including buy-to-let and cash purchases. Registers of Scotland show an increase in cash sales over the last decade, upto 32.5% of transactions in 2016, from 31.1% in 2015 and 17.5% in 2006/07. We have seen a similar growth in cash transactions in the rest of the UK – accounting for over a third of purchases in recent years. Our data indicates that during the lastthree years buy-to-let has accounted for an estimated 6-7% of transactions in Scotland.

Chart 3: Annual number of property transactions in Scotland by type of buyer

Chart 3 News & Views annual number of property transactions in Scotland by type of buyer

Source: HMRC, CML, CML calculations

Housing Policy

The Scottish government has existing devolved powers covering housing policy. Following the 2014 independence referendum, further powers are being deferred to the Scottish parliament covering taxation and welfare.

The Scottish government developed its own version of the Help to Buy equity loan scheme in September 2013, which has notable differences from the English scheme.In Scotland, itis currently planned to run until 2019, closing earlier than the English scheme which runs until 2021. Butconsiderations about what support might be offered in Scotland beyond 2019 have begun.

Under the Scottish equity loan scheme, no interest is charged for the life of the loan while, in the English equivalent, the equity loan is interest-free for the first five years, after which interest is charged.

It has evolved in two phases.Initially launched as theHelp to Buy (Scotland) equity loan scheme, it ran from September 2013 to March 2016. The initial price cap was £400,000, but was subsequently reduced to £250,000. Applications for this phase closed in May 2015 owing to demand.

The second phase, currently running, is called Help to Buy (Scotland) Affordable New Build scheme. It has been available from March 2016 and will rununtil March 2019, with the price caps supposed toreduce steadily over the three year period, from £230,000 to £200,000 and finally £175,000.

However, due to lower than expected demand, the Scotland government recently announced the £200,000 cap applying from 31 March 2017, will remain in place until the scheme ends in 2019. The maximum equity loan available under the Scottish scheme has also been reduced to 15% from 20%.

Support for first-time buyers

The recovery in first-time buyers in Scotland has been supported by the government schemes in operation. The equity loan scheme and its 2016 successor have supported 8,160 households since September 2013. While this will include both movers and first-time buyers, our data indicates that since 2015 the majority of UK purchases supported by an equity loan were taken out by first-time buyers. If a similar proportion applied to Help-to-buy: Scotland, it would suggest that up to aroundone in 10 first-time buyers in Scotland have been supported by this scheme in the last three years.

The Help to Buy mortgage guarantee scheme (which operates in Scotland on the same basis as in the rest of the UK) was used by 9,800 first-time buyers in Scotland from October 2013 to September 2016 – helping 11% of all Scottish first-time buyers in this period, compared to 7% in the UK overall.

There are other schemes local to Scotland. The LIFT scheme (Low-cost Initiative for First-Time Buyers) is an equity loan scheme targeting in particular those with lower incomes buying either new build or open market homes in Scotland. The LIFT schemes have helped a further 12,000 first-time buyers in Scotland since 2007.

Shared ownership in Scotland is not as prevalent as in England.There is no national scheme overseen by the Scottish government, although individual housing associations and/ordevelopers do provide some homes on a shared ownership basis.

Scottish housing policy also focuses on providing affordable housing in all tenures with an ambition to deliver 50,000 homes in the five years to 2021, 35,000 of which will be for social rent. This would represent a large increase from the recent delivery of new housing for social rent. In the five years to 2015/16, only around 22,000 socially rented homes have been delivered.

Right to Buy

The social rented sector in Scotland has historically been larger than in the rest of the UK but has been in decline.

Since the introduction of Right to Buy at the end of the 1970s, there have been 500,000 sales of public sector stock and the size of the social rented sector had fallen from around a million homes to a little under 600,000by 2014. Take-up of the scheme has been larger than elsewhere in the UK – in England for example, almost two million properties have been bought through Right to Buy since the scheme was introduced. The fall in the proportion of housing stock in the social rented sector went from almost 30% in the 1970s to 17% in 2014 (see chart 4). In July 2016, the Scottish Government closed the Right to Buy scheme to protect the remaining social housing stock.

Chart 4: Changing tenure of Scottish housing stock

20170418 Scotland analysis News and Views - chart 4

Source: DCLG, Scottish Government

The private rented sector

The Scottish government is currentlyreforming landlord-tenant law, with changes through the new Private Housing Tenancies (Scotland) Act 2016 that will, when implemented later in 2017, provide a new model tenancy agreement that aims to provide greater security and flexibility for both tenants and landlords.

Stamp duty

In 2014, the Scottish government announced a new land and buildings transaction tax (LBTT) in Scotland, replacing stamp duty and moving away from the widely criticised slab structure to a marginal rate system. By the time Revenue Scotland started to collect LBTT from April 2015, the policy had been amended slightly with the introduction of a 5% band for properties valued at between £250,000 and £325,000.

Buyers in Scotland purchasing lower-valued properties now pay less transaction tax than in the rest of the UK, while those buying higher valued properties pay more. The tipping point occurs at just under £340,000. In 2016, half of first-time buyers paid less transaction tax than they would have done if UK rates had applied, and 98% of first-time buyers in Scotland paid no more.

But, at the other end of the spectrum, around 8% of all buyers pay more transaction tax under the Scottish regime.

The buying process

The house purchase system in Scotlanddiffers fromthe rest of the UK, with offers beingbinding at a much earlier point.Thisdiscourages last-minute changes of mind,and ‘gazumping’ and ‘gazundering’.

For theprocess to work, sellers are required to arrange a home report, including a property survey. Even so, some buyers will require an additional survey for their mortgage valuation – for example, if the valuation survey in thehome report was not conducted by a lenders’ approved surveyor. So, there can be duplication, with buyers and sellers both paying for a valuation. Costs can alsobe incurred before the buyer knows whether an offerhas been accepted.

The outlook

The housing market in Scotland continues to recover from the effects of the financial crisis. First-time buyer volumes have returned to almost pre-crunch levels – although they have been supported by the various government support schemes. Butthere is political uncertainty acrossthe UK and it is perhaps even more pronouncedin Scotland, where a second independence referendum may be on the cards.